Advanced Financial Accounting
Pre-Test Questions
Course Introduction
Advanced Financial Accounting explores complex aspects of financial reporting and disclosure, focusing on topics such as consolidated financial statements, accounting for mergers and acquisitions, foreign currency transactions, segment reporting, and international financial reporting standards (IFRS). The course emphasizes the application of accounting principles to real-world business scenarios, integrates ethical considerations in financial reporting, and develops students abilities to analyze and interpret financial information for diverse stakeholders. Students gain a deep understanding of advanced techniques and regulatory requirements essential for high-level accounting roles in todays global business environment.
Recommended Textbook
Intermediate Accounting Reporting and Analysis 1st Edition by James M. Wahlen
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Page 2
Chapter 1: The Demand for and Supply of Financial
Accounting Information
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Q1) Assume you are tutoring a beginning accounting student who tells you that the members of the FASB must have a great deal of power because they have the authority to issue standards that dictate accounting procedure.
Required:
Explain why accounting standards are the result of compromise and how such compromises are reached.
Answer: In order for a new standard to be issued, a majority of at least a four-to-three vote is necessary. In order for such a vote to occur, the members within the board must negotiate with each other to determine which points are important and which are not. In turn, each board member is influenced by the data and opinions collected from the various interest parties¾prepares, users, and auditors¾during the multistage process of issuing a standard. This includes discussion memorandums, public hearings, and exposure drafts.
Q2) The SEC uses its authority to establish accounting standards, while also enforcing regulations on companies, exchanges, and investors.
A)True
B)False
Answer: False
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Chapter 2: Financial Reporting: Its Conceptual Framework
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Q1) The accounting projects portion of the FASB's conceptual framework project deals with all of the following except
A) how elements should be measured
B) when various elements should be reported
C) which accounting elements should be reported
D) how financial reports should be displayed
Answer: D
Q2) The accounting projects portion of the FASB's conceptual framework project deals with
A) which accounting elements should be reported and how they should be measured
B) which accounting elements should be reported and where the information should be reported
C) how the accounting elements should be measured and how information should be displayed in financial reports
D) when accounting elements should be recognized and how information should be displayed in financial reports
Answer: A
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Chapter 3: Review of a Companys Accounting System
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Q1) The basic purpose of a trial balance is to
A) list all of the accounts in the general ledger
B) list all of the accounts in the general ledger that have a balance
C) be sure that all journal entries have been recorded
D) verify that the total credits equal the total debits
Answer: D
Q2) The accountant failed to make the adjusting entry to record the unpaid wages of its employees as of December 31. This error will cause
A) an overstatement of assets, liabilities, and owners' equity
B) an understatement of expenses, liabilities, and owners' equity
C) an understatement of liabilities and an overstatement of owners' equity
D) an understatement of assets and liabilities
Answer: C
Q3) An advantage of using the general journal is to prevent errors.
A)True
B)False
Answer: True
Q4) ........
Answer: ........
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Chapter 4: The Balance Sheet and the Statement of
Shareholders Equity
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Q1) On the balance sheet, treasury stock is classified as a
A) long-term investment account
B) contra shareholders' equity account
C) companion shareholders' equity account
D) contra asset account
Q2) Which of the following would typically be recorded as an intangible asset with a finite useful life?
A) franchises
B) trademarks
C) brand name
D) goodwill
Q3) Which of the following is not a characteristic of a liability?
A) It involves a responsibility to another entity.
B) The company has little or no discretion to avoid the future sacrifice.
C) The sacrifice contributes directly or indirectly to the company's future cash inflows.
D) The transaction obligating the company has already occurred.
Q4) Name five analyses or ratios used to evaluate a company's performance.
Q5) What are the three categories of intangible assets?
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Q6) What differences exist between IFRS and U.S. GAAP balance sheet presentation?
Chapter 5: The Income Statement and the Statement of Cash Flows
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Q1) Refer to Exhibit 5-2. Compute earnings-based interest coverage for Peace, Love, and Joy Company.
A) 5.08
B) 6.88
C) 6.80
D) 6.08
Q2) Describe the major differences that still exist between the income statement information presentation requirements under IFRS and GAAP.
Q3) Refer to Exhibit 5-2. Compute the gross profit margin for Peace, Love, and Joy Company.
A) 50%
B) 137%
C) 72.5%
D) 82.3%
Q4) In general, revenue is recognized as being earned
A) during the production process
B) upon completion of the production process
C) when cash is received
D) when goods are sold or services are rendered
Q5) What are the four items of other comprehensive income under U.S. GAAP?
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Chapter 6: Cash and Receivables
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Q1) Moose, Inc. established a $250 petty cash fund three months ago. Today, April 21, the petty cash custodian has $198 in cash and receipts for the following: office supplies $12, equipment repairs $25, postage $7, and parking fees $13.
Required:
Prepare a compound journal entry to replenish the fund and reduce its size to $200.
Q2) A company can record uncollectible account by two different procedures. What are the two procedures? Provide a brief description of both. Which one is preferable by GAAP, and why?
Q3) Stacie, Inc. sold goods for $76,000 with terms of 2/10, n/30 on May 1.
Required:
Prepare journal entries for the following:
a.The sale, assuming the gross price method is used.
b.The sale, assuming the net price method is used.
c.Receipt of payment, assuming collection is made on May 31 and the net price method is used.
d.Receipt of payment, assuming collection is made on May 9 and the gross price is used.
Q4) What two issues are related to the valuation of receivables?
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Chapter 7: Inventories: Cost Measurement and Flow Assumptions
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Q1) Refer to Exhibit 7-4. Assuming RJ, Inc. uses a periodic weighted average cost flow assumption, ending inventory for June would be
A) $512
B) $560
C) $768
D) $720
Q2) The basic criterion for including items in inventory is
A) physical control
B) legal ownership
C) physical possession
D) economic control
Q3) Which of the following inventory cost flow assumptions produces the same ending inventory values under both the periodic and perpetual systems?
A) FIFO
B) LIFO
C) average
D) dollar-value LIFO
Q4) What are the cost flow assumptions available to record costs associated with inventory?
Page 9
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Chapter 8: Inventories: Special Valuation Issues
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Q1) When comparing the lower of cost to market
A) the appropriate market value is determined before comparing it to the cost
B) the purpose of the ceiling is to ensure that the write-down is sufficient to cover all expected gains
C) the purpose of the floor is to prevent an excessive gain from being recognized in the future
D) the process is consistent with the principle of conservatism because the goal is to limit excessive swings in gross margin
Q2) Which one of the following statements is false concerning the retail inventory method?
A) Net markups and markdowns are always added and subtracted in order to compute the retail value of ending inventory.
B) Markups and markdowns are recorded only at retail.
C) In the lower of average cost or market method, net markups are excluded from the computation of the cost-to-retail ratio.
D) In computing the cost-to-retail ratio, purchase discounts affect only the cost of purchases and not the retail amount of purchases.
Q3) Describe the lower of cost or market rule.
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Chapter 9: Current Liabilities and Contingencies
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Q1) Current liabilities are obligations of a company that it expects to liquidate within A) one year
B) the normal operating cycle
C) the normal operating cycle or one year, whichever is longer
D) the normal operating cycle or one year, whichever is shorter
Q2) Refer to Exhibit 9-5. The amount of expenditures for warranty costs for 2013 is
A) $ 80,000
B) $120,000
C) $140,000
D) $240,000
Q3) Marble Co. employs a staff of 35 at a total monthly gross pay of $75,000. The company withholds federal income tax at 20% and state income tax at 3% for all employees. In addition, the following tax rates apply: FICA tax, 7.65%; federal unemployment tax, 0.8%; state unemployment tax, 2.7%.
Required: a. Prepare the journal entry to record salaries and employee withholding items for the month of January. *Round number up*
b. Prepare the journal entry to record employer payroll taxes for the month of January.
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Chapter 10: Property, Plant, and Equipment: Acquisition and
Subsequent
Investments
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Q1) Minor Corp. has agreed to expand its operations by opening a manufacturing plant in Bel Air, Maryland. In return, Bel Air will donate an abandoned building and the 5 acres on which it sits to Minor. The land originally cost $1,000,000 and the building $3,000,000. The building's current book value is $380,000, and current appraisals are: land $8,000,000 and building $3,600,000. Minor has also agreed to provide 100 jobs for the next 5 years to Bel Airs' city residents. Minor estimates that the wages to these residents will amount to $4,000,000.
Required:
Prepare the journal entry to record this acquisition on Minor's books.
Q2) Which one of the following statements is true?
A) If a plant asset is self-constructed for less than it would cost to purchase, a profit should be recorded upon the completion of the construction.
B) When property, plant, or equipment is acquired through donation, no entry is recorded.
C) Development stage enterprises need not report losses before sales are made.
D) Interest cannot be capitalized when an asset is substantially complete and ready for its intended use.
Q3) What is a nonmonetary exchange? How is it recorded on the books?
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Chapter 11: Depreciation, Depletion, Impairment, and Disposal
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Q1) Which one of the following statements is true?
A) The activity method of computing depreciation could result in zero depreciation expense in some periods of time.
B) If the activity method is in use, residual value should not be subtracted from cost to determine the depreciation base.
C) The activity method produces a constant total cost of depreciation each period.
D) The activity method should be used when the service life of the asset is affected mostly by the passage of time.
Q2) Refer to Exhibit 11-2. Depreciation expense for 2015 should be
A) $ 600
B) $ 667
C) $ 750
D) $1,500
Q3) ......
Q4) What disclosures are required by GAAP for depreciation?
Q5) Companies can apply composite depreciation to a grouping of dissimilar assets. What procedures must be followed?
Page 13
Q6) What costs can be capitalized as part of the cost of a natural resource?
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Chapter 12: Intangibles
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Q1) At the date of purchase, materials, equipment, facilities, and intangibles purchased from others that have no alternative future uses in research and development or other activities should be
A) capitalized
B) charged directly to retained earnings
C) included in R&D expense immediately
D) charged as a loss from continuing operations
Q2) U.S. GAAP allows a company to capitalize more of the costs of internally generated assets than allowed under IFRS.
A)True
B)False
Q3) For intangible assets that are amortized, the total cost, accumulated amortization, amortization expense, and estimated amortization expense for the next 5 years needs to be disclosed.
A)True
B)False
Q4) For intangible assets that are amortized what does a company need to disclose on its balance sheet regarding those assets?
Q5) Provide two examples that would indicate goodwill is impaired.
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Chapter 13: Investments and Long-Term Receivables
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Q1) On September 1, 2015, WV, Inc., bought $60,000 of MD Printer' 20-year, 6% bonds dated January 1, 2014, for $56,920 plus accrued interest. The bonds pay interest annually and are classified as held-to-maturity. On September 1, 2025, WV sold one-fourth of these bonds for $15,000 plus accrued interest. No entries relating to the bonds had been made since December 31, 2024. Straight-line amortization was used.
Required:
Record the sale of these bonds.
Q2) In its first year of operations, Roger Company purchased trading securities at a total cost of $53,000. On December 31, the end of Roger's fiscal year, the fair market value of those investments totaled $57,000. As a result of these investments, Roger Company will report
A) Investment in Trading Securities of $57,000
B) Investment in Trading Securities of $53,000
C) Unrealized Holding Gain/Loss-Trading Securities of $4,000 on the income statement as ordinary income
D) a credit balance in the contra account to Investment in Trading Securities of $4,000
Q3) What are the four components necessary to account for investments in trading securities?
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Chapter 14: Financing Liabilities: Bonds and Notes Payable
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Q1) Cherry Corporation sold $200,000 of 12% bonds at par. Each $1,000 bond carried ten warrants, each of which allows the holder to acquire one share of $10 par common stock for $30 per share. After issuance, the bonds were quoted at 99 ex rights, and the warrants were quoted at $4 each. Cherry Corporation should have assigned to the rights a value of
A) $8,000
B) $7,767
C) $7,500
D) $5,882
Q2) Refer to Exhibit 14-7. Which of the following would be included in the interest accrual entry on May 1, 2016?
A) credit to Interest Payable for $3,333
B) debit to Bond Interest Expense for $3,549
C) credit to Discount on Bonds Payable for $4,259
D) debit to Premium on Bonds Payable for $451
Q3) The effective interest method of amortization assumes a stable
A) interest expense
B) interest rate
C) book value
D) amortization amount
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Chapter 15: Contributed Capital
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Q1) Treasury stock does not vote, has no preemptive rights, cannot participate in dividends, and has no liquidation rights.
A)True
B)False
Q2) Under IFRS companies are allowed to revalue their property, plant, and equipment as well as intangible assets, the revaluation is based upon market value and can be either increased up or down.
A)True
B)False
Q3) When common stock is issued at an amount greater than par value, the difference between the par value and the proceeds from the sale is recorded by
A) crediting the common stock account
B) debiting an additional paid-in capital account
C) crediting the retained earnings account
D) crediting an additional paid-in capital account
Q4) Noncompensatory share purchase plans are utilized to increase employee ownership.
A)True
B)False
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Chapter 16: Retained Earnings and Earnings Per Share
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Q1) Tulip Corp. has $1,000,000, 6%, nonconvertible bonds due in 2015 and $1,500,000, 3%, convertible bonds due in 2016. The basic earnings per share are $1.25 and the diluted earnings per share are $1.18. Based upon this information, Tulip must disclose
A) basic earnings per share because the convertible bonds are not dilutive
B) basic earnings per share and dilutive earnings per share because the convertible bonds are dilutive
C) basic earnings per share, and the convertible bonds must be disclosed in the stockholders' equity section of the balance sheet
D) basic earnings per share and dilutive earnings per share, and the convertible bonds must be disclosed in the stockholders' equity section of the balance sheet
Q2) Under the treasury stock method, the number of shares of common stock assumed to be reacquired is determined by using the
A) ending market price of the stock
B) average market price of the stock
C) beginning market price of the stock
D) par value of the stock
Q3) What are the steps necessary to compute diluted earnings per share?
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Chapter 17: Advanced Issues in Revenue Recognition
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Q1) The cost recovery method
A) is generally not acceptable
B) recognizes gross profit before it has recovered all of the cost of the item sold
C) is less conservative than the installment method
D) is the preferred method under GAAP
Q2) Realization occurs when
A) revenues have been earned
B) noncash resources are converted to cash or rights to cash
C) an item is formally recorded in the books
D) an item is reported in a company's financial statements
Q3) Refer to Exhibit 17-3. How much revenue should be recognized by Dundee in 2014?
A) $12,000
B) $17,100
C) $25,000
D) $50,000
Q4) The installment and the cost recovery are methods that recognize revenue after the earnings process is complete and when realization occurs.
A)True
B)False
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Chapter 18: Accounting for Income Taxes
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Q1) Discuss both interperiod and intraperiod tax allocation methods.
Q2) Which of the following are required disclosures related to uncertain tax positions?
A) the management discussion of the tax position in which management believes with reasonable probability that significant changes will take place within 12 months
B) a reconciliation of beginning and ending balances of the unrecognized tax benefits
C) the total amount of the unrecognized tax benefit that would affect the effective tax rate if recognized.
D) All of these choices
Q3) Which one of the following requires interperiod tax allocation?
A) premium paid on key executives' life insurance
B) warranty expenses related to a three-year warranty period
C) interest received on municipal obligations
D) percentage depletion in excess of cost depletion
Q4) Discuss what criteria a company should employ to determine whether a deferred tax asset is considered impaired or "more likely than not" to be realized.
Q5) What is intraperiod tax allocation?
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Chapter 19: Accounting for Postretirement Benefits
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Q1) Which of the following is not a component of pension expense to be reported on a company's income statement?
A) interest cost
B) unrecognized past service cost
C) service cost
D) expected return on plan assets
Q2) To improve usefulness of defined pension plans, GAAP requires disclosure of reconciliations of the beginning and ending amounts of the projected benefit obligation and fair value of the plan assets.
A)True
B)False
Q3) Other postretirement benefits are provided to former employees after employment for retirement.
A)True
B)False
Q4) One type of post-retirement benefit other than pensions is healthcare benefits. Required:
Discuss the major differences between postretirement healthcare benefits and pensions.
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Chapter 20: Accounting for Leases
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Q1) The lessor should report the Lease Receivable for a sales-type lease on its balance sheet as
A) a current asset
B) a long-term asset
C) a current asset for the current portion and a long-term asset for the remaining amount
D) only a note to the financial statements
Q2) A capital lease should be recorded in the lessee's accounts at the inception of the lease in an amount equal to
A) the present value of the minimum lease payments less the executory costs included in the minimum lease payments
B) the total value of the future rental payments less any estimated contingent payments
C) the total value of future rental payments less any executory payments included in the future payments
D) the total value of the minimum lease payments less executory costs, if any
Q3) What three criteria must be met for the lessor to account for the lease of land as a sales-type lease?
Q4) What are the disclosure requirements of direct financing and sales-type leases?
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Chapter 21: The Statement of Cash Flows
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Q1) The statement of cash flows, along with other financial and operating information, enables investors, creditors, and other users to assess a company's liquidity, financial flexibility, and operating capability. Distinguish between liquidity, financial flexibility, and operating capability.
Q2) Treatments of items in the cash flow statement that differ between IFRS and GAAP include all of the following except the allowed treatment of
A) any cash outflows for development costs that were capitalized as intangible assets
B) losses on the early retirement of bonds
C) bank overdrafts
D) income taxes related to financing and investing activities
Q3) Which of the following would be added to net income in computing cash flows from operating activities?
A) an increase in accounts receivable
B) an increase in inventories
C) a decrease in deferred taxes payable
D) a decrease in prepaid expenses
Q4) What are the three categories of cash inflows from operating activities under the direct method?
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Chapter 22: Accounting for Changes and Errors
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Q1) A change in accounting principle from one that is not generally accepted to one that is generally accepted should be treated as
A) an error and corrected by prior period adjustment
B) a change in accounting principle and the cumulative effect included in net income
C) a change in accounting principle and prior period financial statements are restated
D) a change in accounting principle and adjustments made prospectively
Q2) When making a retrospective adjustment, all of the following steps are included except
A) computing the cumulative effect of the new accounting principle as of the beginning of the first period presented
B) adjusting the current period net income for the cumulative effect of the change
C) adjusting the carrying value of impacted assets and liabilities
D) disclose the nature and reason for the change in accounting principle, including the new principle is preferable
Q3) What are the three type of accounting changes defined by GAAP; provide a brief explanation of each?
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Chapter 23: Time Value of Money Module
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Q1) The present value of a deferred annuity is determined on today's date, because the annuity payments begin some period after today's date.
A)True
B)False
Q2) Beginning December 31, 2018, eight equal annual withdrawals will be made.
Required:
Using the appropriate tables, determine the equal annual withdrawals if $30,000 is invested at an interest rate of 14% compounded annually on:
1) January 1, 2018
2) December 31, 2018
3) January 1, 2013
Q3) Interest compounded quarterly on a $100,000 principal amount at 12% for one year is
A) $ 9,273
B) $12,551
C) $12,000
D) none of these
Q4) Complete the following equation:
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